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Opinions of Thursday, 12 August 2021

Columnist: Thomas Hughes Amissah

Debt and it's impact

Debt is defined as an amount owed for funds borrowed Debt is defined as an amount owed for funds borrowed

Paul Samuelson and W. D. Nordhaus: “A large government debt tends to reduce a nation’s growth in potential output because it displaces private capital, increases the inefficiency from taxation, and forces a nation to service the external portion of the debt.”

Debt is defined as an amount owed for funds borrowed. The definition is not from any demon or principalities.

Let me try to help the public with the utterances made by Economic Whizkid Dr. Bawumia on what debt is and its impact on the economy.

Our almighty Bawumia claimed that having borrowed more than any successive govt is nothing if your inflation is low, the interest rate is lower and your currency is not seeing much depreciation.

Well, I was taught that having lower or higher inflation does not mean you are not doing well, in a free market economy, price is an indicator for a producer to produce more so having higher inflation can be the good the same way it can be bad for a consumer. Inflation is a function of the CPI and not entirely an issue of borrowing.

Interest rate is a function of the cost of funds from depositors and nonperforming loans, a check from the financial statements of most banks makes one wonder if the so-called low-interest rate is real or fiction? Is the rate a product of the market or an invisible hand controlling the rate? What BoG does is an indicative rate to the players and what is the support of BoG to these players for us to appreciate or benefit from these “low” rates.

On the depreciation of the currency, the dollar crossed 6.0 in the first week of July notwithstanding the pumping of money by the govt to make the cedi strong, the supposed appreciation or stability of the cedi is not supported by any fact or industry evidence but Same invisible hands for our economy to look good in the eyes of the public. The market would expose the true fact.

HIPC is a choice a govt made and some of the so-called achievements of NPP are linked to HIPC benefits so HIPC is not all that bad. NDC took Ghana to IMF and what is wrong with going to a body that you belong for support, if there is something wrong then we should discount all balance of payment support we received from IMF when NPP came to power.

Why did NPP call for extension of the IMF support if it was a bad decision by NDC? Did NPP apply for Rapid Credit Support from IMF in 2020? I thought IMF is a monster or demonic

These are some of the negatives effects of unprecedented borrowing

The Tax Burden

When the government borrows money it has to pay interest on such debt. Interest is paid by imposing taxes on people. If people are required to pay more taxes simply because the government has to pay interest on debt, there is likely to be adverse effects on incentives to work and to save.

If the government imposes an additional tax on Mr. Q to pay him interest, he might work less and save less. Either of the outcome or both must be reckoned a distortion from efficiency and well-being. Moreover, if most bondholders are rich people and most tax-payers are people of modest means repaying the debt-money redistributes income (welfare) from the poor to the rich.

This is evidenced by the restructuring of the VAT tax by introducing GET FUND Levy & NHIL as a separate line item and most recently the COVID-19 Levy.

Higher Interest Rates

The government depends on investors' continuous purchase of Government of Ghana long-term bonds to fund its spending or external borrowing. If the bond market gets nervous about the excessive borrowing of the government as a result of the high default risk and the demand for the government's bonds falls, their price also declines as a result.

The fall in the price will cause the yield on the bond to rise. This means the nation pays more in interest for every cedi borrowed. When the government borrows more from the domestic market through the sale of treasury bills it increases the interest rates paid on them and this risk-free interest rate forms the basis for borrowing cost.


Stifling Economic Growth

If the government borrows money from the people by selling bonds, there is the diversion of society’s limited capital from the productive private to the unproductive public sector. The shortage of capital in the private sector will push up the rate of interest.

In fact, while selling bonds, the government competes for borrowed funds in financial markets, driving up interest rates for all borrowers. With the large deficits of recent years, many economists have been concerned about the competition for funds; also higher interest rates have discouraged borrowing for private investment, an effect known as crowding out.

This, in its turn, will lead to falling in the rate of growth of the economy. So, the decline in living standards is inevitable. This seems to be the most serious consequence of a large public debt. As Paul Samuelson has put it: “Perhaps the most serious consequence of a large public debt is that it displaces capital from the nation’s stock of wealth. As a result, the pace of economic growth slows and future living standards will decline.”


Negative effect on long term investment

Raising taxes or ramping up inflation to deal with the debt both have a negative impact on investors' willingness to invest. High levels of public debt also call into question whether the debt will be repaid in full.

That can lead to a higher risk premium, and that's associated with higher long-term real interest rates, which in turn has negative implications for investment as well as for consumption of durables and other interest-sensitive sectors, such as housing.

The rigidities in our recent budgets tell it all. Investment in infrastructure and other revenue-generating investments has dropped significantly since 2016 because interest payment as a component of tax revenue is more than 80%.


Public Debt reduces society’s consumption possibilities

When a country borrows money from other countries (or foreigners) an external debt is created. It owes its all to others. When a country borrows money from others it has to pay interest on such debt along with the principal. This payment is to be made in foreign exchange (or in gold).

If the debtor nation does not have sufficient stock of foreign exchange (accumulated in the past) it will be forced to export its goods to the creditor nation.

To be able to export goods a debtor nation has to generate sufficient exportable surplus by curtailing its domestic consumption. Thus, an external debt reduces society’s consumption possibilities since it involves a net subtraction from the resources available to people in the debtor nation to meet their current consumption needs.

Public Debt and Growth

By diverting society’s limited capital from productive private to unproductive public sector public debt acts as a growth-retarding factor. Thus an economy grows much faster without public debt than with debt.

When we consider all the effects of government debt on the economy, we observe that a large public debt can be detrimental to long-run economic growth. What is more serious is that an increase in external debt lowers national income and raises the proportion of GNP that has to be set aside every year for servicing the external debt.

This seems to be the most important point about the long-run impact of the huge amount of public debt on economic growth.

The NDC can show evidence of infrastructure that each fund borrowed was used for, can the same be said about this Nana Addo and Bawumia led govt? NDC made smart borrowing ie most of the money went into projects that could pay for themselves eg Atuabo Gas.

A sinking fund was established to retire most of these loans.
Hospitals, roads, water and electricity expansion, etc were done loans.
The late President Mills and President John Dramani Mahama didn’t claim to be “chew and pour” economic practitioners sorry wizards but their works speak volumes.

Smart ideas gave us Terminal 3, Harbour expansion, Circle and Kasoa interchanges, Kotokuraba and Kejetia Market, Kumasi Airport Facelift, HO Airport, investment in the oil sector like the TEN, etc, these are what the not too incompetent NDC did but can we compare these with your KVIPs and Borehole behind the Jubilee house?

On any day, when it comes to debt management and prudent use of debt NDC stands tall unless it is about demons and principalities that NDC would be found wanting.

To conclude, we need a national prayer meeting to exorcise the demons and principalities that are affecting the competence of Dr. Bawumia or his competence was the hype? The 77 gods in my hometown do not have any bearing on the hollow argument of Bawumia.